Audit: Md. firms got state tax credits without documenting costs

Eight Maryland businesses approved for $34 million in tax credits for job creation from 2007 to 2010 failed to document their project or startup costs, a legislative audit of the state's economic development agency has found.

"The notion that the taxpayers invested $250,000 in a company to create jobs in Maryland and they moved out of Maryland — and DBED didn't get the money back — is shocking," said state Sen. James C. Rosapepe, co-chair of the Joint Audit Committee.

Auditors in the Department of Legislative Services, which did not disclose the names of the companies, have asked the agency to tighten requirements and monitoring in its tax-credit and financing programs.

The report highlights "a lot of controls that we would say would be basic or essential to making sure that taxpayer money is being used the way it's supposed to be used," said Bruce A. Myers, legislative auditor for the Office of Legislative Audits.

DBED spokeswoman Karen Glenn Hood said Tuesday that most of the deficiencies — some of which occurred more than four years ago — have been corrected or are being addressed.

In a Feb. 6 response to auditors, Economic Development Secretary Christian Johansson said the department agreed with the recommendations.

"Most of the findings we have already rectified or made amends to whatever concerns the auditors had," Hood said.

Auditors reviewed 10 applicants that the Department of Business and Economic Development certified as eligible for $42 million in credits through the One Maryland Tax Credit program during fiscal years 2008 through 2010 — out of a total of 17 applicants that were certified for $65.8 million in credits.

Eight of the 10 businesses failed to document their project or startup costs, even though the amount of the tax credits is based on those costs, the report found.

Four of the eight applicants received tax credits totaling $11.7 million from 2006 to 2009, according to the most recent information available from the state comptroller, the audit showed.

Businesses are eligible to receive the credits after they create a certain number of jobs. The 17 applicants in the program reported having created a total of about 1,400 jobs.

"Our question is on the cost," Myers said. "To get this money, 25 jobs at minimum had to be created and maintained for a certain period of time. We didn't have an issue with that part of the matter. It was the costs that weren't verified and whether they actually had the costs that they're claiming. They very well might have, but the department didn't get any evidence of that."

Hood said the department requested information on applicants' costs but did not demand the level of detail that auditors wanted. Applications now ask for greater detail, she said.

The report also looked into three investments in the Maryland Venture Fund financing program from fiscal 2008 through 2010 that totaled $450,000.

The Department of Business and Economic Development invested $250,000 from the program's enterprise investment fund in 2008 in ClassifEye, an identity authentication software company that located in Rockville. The state's agreement with the company included a repurchase provision allowing the department to recover its investment plus interest of 10 percent a year if the company were to move out of state within five years.

ClassifEye closed its Rockville operations in March 2009, less than a year after the DBED investment. As of June 6, the department had not moved to collect the investment plus interest, a total of $325,000, auditors found.

"No action was taken to recover the investment because the company's website still listed Maryland as its address and because the company's president has indicated to DBED that the company intends to return to Maryland once economic conditions improve," auditors reported being told by the department.

After auditors disclosed their findings, the Department of Business and Economic Development sent a letter to ClassifEye's president demanding repayment, the report said.

However, Hood said the state knew of ClassifEye's move before auditors raised the issue.

"We had been working with their local agent here to recover the funds and making phone calls to the company," she said. "Conversations with the company are continuing. Hopefully, we will be able to recover those funds."

Rosapepe said the report points out "sloppiness, not malfeasance."

"From the audit, it looks like they are not paying attention," he said. "It gives the impression that the folks in charge of the programs are not treating taxpayer money as they would treat their own money."

He said the audit makes a case for tightening management of the programs — which, he noted, DBED has agreed to do.

"I don't think it makes a case against these investment programs," he said. "They are important, and it's important they be done right."